A double clustering algorithm for financial time series based on extreme events
Giovanni De Luca () and
Zuccolotto Paola ()
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Giovanni De Luca: University of Naples Parthenope, Via G. Parisi 13, 80132Naples, Italy
Zuccolotto Paola: University of Brescia, C. da S. Chiara 50, 25122Brescia, Italy
Statistics & Risk Modeling, 2017, vol. 34, issue 1-2, 1-12
This paper is concerned with a procedure for financial time series clustering, aimed at creating groups of time series characterized by similar behavior with regard to extreme events. The core of our proposal is a double clustering procedure: the former is based on the lower tail dependence of all the possible pairs of time series, the latter on the upper tail dependence. Tail dependence coefficients are estimated with copula functions. The final goal is to exploit the two clustering solutions in an algorithm designed to create a portfolio that maximizes the probability of joint positive extreme returns while minimizing the risk of joint negative extreme returns. In financial crisis scenarios, such a portfolio is expected to outperform portfolios generated by the traditional methods. We describe the results of a simulation study and, finally, we apply the procedure to a dataset composed of the 50 assets included in the EUROSTOXX index.
Keywords: Financial time series clustering; tail dependence; copula functions; portfolio selection; 60G70; 62M10 (search for similar items in EconPapers)
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